4/28/2009

The Nationalization of the US auto industry

Government ownership implies much less efficiency. It implies political decisions in running the company. Cutting out profitable larger cars to please the environmentalists should help Ford, but on the other hand I predict very large subsidies for a while to come. The WSJ has this:

Under the plan, GM is asking the Treasury Department for an additional $11.6 billion in loans, on top of the $15.4 billion it has already received. It envisions giving the government at least half ownership of the company as payment for half of the loans.

At the same time, GM said it would use stock instead of cash to pay off half the $20.4 billion it owes a United Auto Workers fund to cover retiree health care. That stock would leave the union owning about 39% of GM.

The upshot would be the transformation of a troubled American icon, leaving it in the hands of the government and its main union. The situation, fraught with complications and potential conflicts, comes on top of the U.S. government taking stakes in banks and insurer American International Group Inc.

Also Monday, the UAW and Chrysler LLC disclosed that the union would own 55% of that restructured car maker, while Fiat SpA would get 35% and the U.S. and lenders would own the rest. . . . . .

The two parties that turned the Big Three into a perennially limping freak of unwritten industrial policy now will take formal ownership of their handiwork. The United Auto Workers (UAW) would own 39% of GM. The federal government would own 50%. The creditors will be shafted with just 10%. (In the Chrysler plan being discussed, labor would own 55%, making it effectively a subsidiary of the UAW.) . . . .

Lately some have doted, with wonderment and admiration, on the Obama administration's apparent willingness to drive a hard bargain with the UAW as it tries to impose a stage-managed replica of bankruptcy on GM and Chrysler. Please.

In a real bankruptcy, which is the natural fate of companies unable to meet their obligations, Chrysler and GM would be run (or liquidated) for the benefit of their creditors, not their workers. But, here, "pattern bargaining" will remain the law of the Detroit jungle. The UAW will continue to use its unnaturally augmented clout to extract uncompetitive pay and benefits (it can do no other given its internal incentives). As it has for 40 years, Washington will pitch in with one improvisation after another, disguised as energy policy, trade policy, health-care policy or environmental policy, to stop the rivets from popping off. Politics, especially Democratic electoral politics, will play a more dominant role than ever. . . . .

The tentative debt-swap agreement by large lenders including J.P. Morgan Chase & Co. and Citigroup Inc. followed the auto maker's landmark accord that would give the United Auto Workers union control of 55 percent of the company.

WASHINGTON -- Citigroup Inc. may need to raise as much as $10 billion in new capital, according to people familiar with the matter, as the government continues negotiations with banks over the results of its so-called stress tests.

The bank, like many others, is negotiating with the Federal Reserve and may need less if regulators accept the bank's arguments about its financial health, these people said. In a best-case scenario, Citigroup could wind up having a roughly $500 million cushion above what the government is requiring. . . . .

@be603 to me this is more reminiscent of British Leyland (which was essentially the entire British auto industry) and the Labour Party's control of the British ship building industry, although I do not know much about the inner workings of Renault. Both were done in the name of the "workers" to stabilize the job market. Both failed miserably the number of jobs in ship building fell to 30,000 from 200,000 under the Labour party's watch. British Leyland fell to pieces about as fast as their cars turned to iron-oxide (which was stunningly quick).

As a hobby, I have been closely following auto industry for the past five years, GM in particular. The turn around, in terms of product and quality at GM, is nothing short of astonishing. However, the bureaucratic turn around has been the slowest imaginable. Through the years I have struggled to put my finger on the crux of the problems at GM but the relationship with the UAW is certainly near the top of the list. The UAW has incredibly uncompetitive benefits for the type of work that they do. The UAW doesn't do better work than, say, a Nissan factory of non-unionized workers. But who is to blame?

It is clear why the workers would align with the UAW. They have received the best of the best pay and benefits. At the same time, they have seen their ranks fall from over 1.5 million to under 500,000. Many of those that have lost their jobs are receiving generous pensions and postretirement benefits. Even so, it may appear that the UAW is risking the long term health of their companies for short term gains.

It is unclear why the companies work with the UAW. The UAW did not get these contracts all by themselves. The US automakers have found it easier to acquiesce to the demands of the UAW in short term wages and in long term obligations rather than risk a long and costly strike or doing the hard work to negotiate more reasonable contracts. But just because these contracts seem unreasonable to many does not make them void and GM must honor them, unless they go to real bankruptcy.

Finally, what does the UAW achieve? Do they provide better workers for the dollar?